- NZD falls against all major currencies
- RBNZ says willing to cut intrest rates further
- Boosts quanitative easing to N$100BN
Above: File image of RBNZ Governor Adrian Orr at a press conference. Image courtesy of RBNZ.
- GBP/NZD spot rate at time of writing: 1.9956
- Bank payment rates (indicative guide): 1.9258-1.9397
- FX specialist providers (indicative guide): 1.970-1.9776
- More on getting market beating exchange rates here
The Pound is set to retest the key psychological level of 2.0 against the New Zealand Dollar following an update from the Reserve Bank of New Zealand that saw policy makers boost quantitative easing while confirming that cutting interest rates to 0% or below remained a strong possibility in future months.
The New Zealand Dollar was the worst performing currency of the day, falling against all its G10 rivals, after the RBNZ increased the quantitative easing (LSAP) programme to $100BN while lengthening the period in which the programme must be carried out from 12 to 22 months.
But the RBNZ also indicated it was considering further measures to help the economy including cutting interest rates below 0.25% and potentially into negative territory.
A ‘Funding for Lending Programme’ - similar to that used at the Bank of England - was another option under consideration.
"It is hard to imagine a more dovish set of policies and commentary today – yields and the NZD both fell in response," says Sharon Zollner, Chief Economist at ANZ.
The Pound-to-New Zealand Dollar exchange rate was a third of a percent higher at 1.9904, as it extended a four week run of unbroken gains. "GBP/NZD has climbed a massive 4.7% in 14 trading days since bottoming out around the NZ$1.90 level. The currency pair is now back in positive territory for the year and looks to have held onto its long-term recovery from the 40-year low printed back in 2016," says George Vessey, UK Strategist at Western Union.
The New Zealand-to-U.S.-Dollar exchange rate was down a third of a percent at 0.6546.
Above: The NZ Dollar is the worst performing major in the wake of the RBNZ policy event
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We reported yesterday some foreign exchange strategists saw a chance the New Zealand Dollar could rally in response to the RBNZ decision, however it appears the central bank really has thrown the kitchen sink at the problem and signalled to markets that it is without doubt going to continue delivering 'easy money' for some time to come.
The rule of thumb in foreign exchange markets is that when a central bank eases the supply of money - as is the case with the RBNZ - the currency it issues tends to decline in value.
The RBNZ is therefore likely to remain a source of weakness for the New Zealand Dollar going forward, cementing its status as one of 2020's major under performers.
"The RBNZ today delivered a more dovish Monetary Policy Statement than we had expected. Instead of maintaining a monetary policy stance similar to the May MPS, the RBNZ instead produced a document containing not only heightened stimulus measures but a heightened prospect of using more alternative tools to give the economy an even bigger kick. And right at the top of the Bank’s list was a negative OCR," says Stephen Toplis, economist at BNZ.
The signalling from the RBNZ was potentially the most potent element of today's event as the threat of utilising more tools to keep funding costs lower for longer is potentially as effective at achieving its aim as the actual boost to the quantitative easing programme.
"The RBNZ spent some time discussing alternative policy instruments. While it is obviously in no rush to utilise an expanded tool kit (over and above the LSAP extension), it did, nonetheless, identify that a negative OCR, combined with a funding for lending programme, as being the first cab off the rank. The possibility of this was mentioned more than once in the Monetary Policy Committee’s Summary Record of Meeting. Given this, in our opinion, the chances of a negative OCR have just risen substantially," says Toplis.
BNZ say the expect the Bank will not move on interest rates again until at least April 2021 because it has been adamant that forward guidance means forward guidance. But beyond April 2020 BNZ say the probability of negative interest rates being introduced to New Zealand is around 50%.
Expectations of such low rates will keep the interest paid on New Zealand government and corporate bonds supressed, thereby reducing their attractiveness to international investors. For years capital has flown into New Zealand - propping up the NZ Dollar as a result - as investors sought out the high yields on offer. With this incentive removed it is clear to see that the New Zealand Dollar moves forward without what was once a key pillar of support.
BNZ note that today’s statement would have been "99% prepared" before the reintroduction of lockdown measures in Aukland owing to new cases of covid-19 being reported in the community.
"This means the RBNZ’s “true” view would now, probably, be even more dovish than this statement already is," says Toplis.
Indeed. the RBNZ’s baseline scenario in its MPS is that “New Zealand avoids a widespread outbreak of Covid19 and is Alert Level 1 or lower from early June 2020”. "For now, this is clearly not the case with Auckland at Alert Level 3 and the rest of the country at Alert Level 2," adds Toplis.
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